Brief for Amici Curiae 37 Economists, Antitrust Scholars, and Former Government Antitrust Officials in Support of Appellees and Supporting Affirmance

The amici are 37 experienced economists, antitrust scholars, and former government antitrust officials who share a professional interest in seeing antitrust law develop in a manner that applies reliable economic principles and methods to the actual facts and data of specific cases.

The district court correctly applied economic analysis to assess the effect of this vertical merger on consumers. It found no credible evidence of an anticompetitive effect. At the same time, the district court did find credible evidence that the merger would produce efficiencies. Consequently, the district court concluded that the government had not shown that the merger would likely diminish competition or harm consumers. Despite the arguments of the government and some amici, those findings should stand, as there is no indication that they were clearly erroneous.

The district court’s findings do not rest on a misunderstanding of economic theory or its empirical application. To the contrary, they reflect a deep understanding of what facts are needed to apply economic theory reliably and a clear-minded appraisal of the failures of the government’s evidence. The district court rejected the government’s case against the merger not because of a lack of understanding of key economic principles, but because it decided that the weight of the industry testimony showed no significant anticompetitive effect but did show credible efficiencies, including those agreed to by the government, and because it decided that the government’s case, including the testimony of its leading expert economic witness, Dr. Carl Shapiro, was ultimately unpersuasive.

According to the government, bargaining theory demonstrates that the merger would raise prices for rival multichannel video programming distributors (MVPDs) such as cable companies. In support of this claim, the government and Dr. Shapiro put forward a Nash bargaining model of price negotiations between Turner as content provider, on the one hand, and video programming distributors, on the other hand. Using this model, the government argued that the merger would raise resulting prices because the fallback position for Turner—the path that it would rationally consider taking if the negotiations fell through—would be less costly after the merger. That was so, the government asserted, because the resulting blackout of Turner programming would profitably divert some of the video programming distributor’s subscribers to AT&T’s DirecTV.

The district court found that, although Nash bargaining can be a useful approach to evaluating mergers in some cases, the empirical evidence in this case did not support the government’s claims, even when viewed through the lens of Nash bargaining. In large part, the problems the district court identified rested on the inputs to Dr. Shapiro’s model, not the model itself. The court found that Dr. Shapiro employed unreliable estimates of critical inputs, including his estimate of the number of subscribers who would depart from their video content distributors and switch to DirecTV if faced with a loss of Turner content and his use of outdated and inflated profit margins for AT&T. And, critically, the district court found that small changes in the values of these inputs caused the model’s predictions to change dramatically. Indeed, modest changes to the inputs caused the predicted sign for competitive harm to flip, so that the government’s predicted prices for the programming in question would fall after the merger rather than rise. Moreover, the district court decided, on the basis of industry testimony, that the long-term blackouts that Dr. Shapiro used as the fallback option in his Nash bargaining model are not credible threats. Given these findings, the district court was fully justified in holding that the government had failed to meet its burden to prove that the merger was likely to harm competition and consumers.

The government argues that the district court’s reasoning is illogical, that it failed to understand the Nash bargaining model, that it weighed the industry testimony incorrectly, that it should have taken long blackouts into account as credible threats, and that the diversion rates driving Dr. Shapiro’s model are sufficiently probative. An amicus brief has been filed by 27 distinguished scholars in support of these claims.

In fact, however, a review of the district court’s reasoning confirms that the court did understand the Nash bargaining model, including the premise that the fallback option must be credible to be effective in influencing the negotiated outcome. It also confirms that the court found that the results of the government’s model turn sensitively on the values of the inputs used to run the model and that, accordingly, the court understood that, with unreliable estimates of those inputs, the model cannot support a reliable inference of competitive harm. The court also found that the reliability of the government’s model was further undercut by its inconsistency with testimony on how real-world industry bargaining works and on the actual, observed effects of past vertical integration in the industry.

Against this background, there is no basis from settled economic principles or practice to conclude that the district court’s findings regarding the relevance and reliability of the government’s proffered evidence were clearly erroneous. Given the facts and testimony presented in its opinion, the district court reasonably concluded that the government failed to meet its burden of proof.